A big increase in U.S. labor costs has economists seeing threat of recession

Jordan Peterson works on a trailer at the Airstream factory in Jackson Center, Ohio. Expenses per worker in the U.S. increased 2.4 percent last year. ﻿

Photo: Jay LaPrete, FRE

The biggest rise in U.S. labor costs in eight years is squeezing company profits and heightening fears of a recession.

Expenses per worker - so called unit labor costs - increased 2.4 percent last year, the most since 2007, after a 2 percent gain in 2014, according to data released Thursday by the Labor Department.

The rising wage bill is taking a bite out of companies' bottom lines and prompting concern among some economists that firms will slash spending and hiring in response.

"The outlook for profits is challenging," said Russell Price, a senior economist at Ameriprise Financial in Detroit. "Hiring was strong but the pace of business activity was weak. It means hiring will decelerate."

Bruce Kasman, chief economist at JPMorgan Chase in New York, highlighted the danger of a "huge squeeze on earnings" in saying that he had recently raised his odds of a recession in 2016 to 30 percent to 35 percent, from around 25 percent six weeks ago and 20 percent three to four months back.

Behind the jump in labor costs: near stagnant productivity. Employee output per hour worked rose by an annual average 0.5 percent over the past five years, the smallest increase during a similar period in three decades.

Productivity has languished since the end of the last recession as companies remain hesitant to invest in new technologies, relying instead on new hires to meet demand.

Firms have had difficulty offsetting their higher wage bills by raising prices because their ability to do that in a competitive environment has been limited, Kasman said.

Analysts estimate profit at members of the Standard & Poor's 500 Index dropped 5.6 percent in the final three months of 2015, the third consecutive quarterly fall, the longest streak since the end of the last recession in 2009. Excluding energy companies, profit is forecast to have edged up 0.5 percent.